Regret Is Not a Helpful Planning Tool When It Comes to Your Finances

I was an Amazon early adopter. Since I love to read, the ability to scour the universe of books and buy with a click was a dream come true. As the books on my nightstand began to pile up, though, I realized that I may have loved to buy books even more than I loved to read them.

One thing that I didn't buy in 1997 was Amazon stock. If I had simply taken the money that I spent on the books I didn't read and put it into Amazon stock, I could have sold those shares and bought a bookstore.

What I am describing is the most useless yet oft told concept in financial planning — the counterfactual. The counterfactual is when you talk about what you didn't do in a way that implies you obviously should have done it. It is harmful because it is based on a thread of truth. It is also harmful because it implies that there was only one outcome and you missed it. For example, my story means that I had bought the Amazon stock and held it through the internet bubble, the Great Recession, and the pandemic and only sold it to sit at a picnic bench, smoking my pipe outside my bookstore. This is crazy. I don't smoke a pipe.

Counterfactuals are harmful because they are regret based. My story could have been that because we had dogs and cats, I redirected all the money we spent on chew toys and catnip into, an internet bubble casualty that had I gone "all-in" on, would have left my family eating cat food. But that is not how counterfactuals work. We hardly ever talk about the disasters we avoided.

We are in the halcyon days of counterfactuals with cryptocurrency, IPO's, a 2020 stock market swoon followed by an historic recovery, and a real estate rush that is either making us jump in or feel left out. Take a breath. We tend to make counterfactuals into binary outcomes — I could have either done this or done that. If there were only two possibilities, decision fatigue would not exist.

There are a couple of ways you can tell if you are on the counterfactual roller coaster. The first is when you say "I knew." Actually, no you didn't. We can never know the future. We can look at things and believe there is a more likely outcome, but even if something is more likely, it doesn't mean it is going to happen. Since the 2008-09 stock market dive, we have had relatively uninterrupted returns.

Some of you know that we are due for a crash, while others know that happy days are here again. You don't know. In the face of not knowing, why would you take on more risk than you need or less risk than is appropriate given your age and objectives? Simply setting up a schedule to rebalance from bonds to stocks when the markets are strong or stocks to bonds when they falter will let you take action without having to be completely right. And don't feel like you have to dip your toe in the water on real estate you may not be using for several years because even with low interest rates and a runaway market, your annual carrying costs can probably be better put to work elsewhere.

The most damaging counterfactual starts with "If I had only." In our financial world, regret can lead us to better evaluation tools — I regret selling all my stocks in March of 2009 or 2020 and wish I would have just sold a little. But it can also lead to really bad decisions — I regret not buying Bitcoin at $10,000 so I'll buy it at $60,000. Determine what you want to do and why before you get overrun by the next big craze.

I can't wait to read in the back seat of my autonomous car as it lifts off and hovers above all the empty retail space. It may happen. Or it may not.